It is, indeed, an honor to be asked to speak again at the Boao Forum. Much has changed in the region since the last Conference. It is striking that the reason for the cancellation of last year's conference, due to the SARS crisis, seems such a distant event today. I thought it fitting to speak of China's other crises, related, not to disease, but to economic development.

By way of background I started investing in China in 1980, when I founded the first American investment company here, ChinaVest. During the past twenty years my firm has invested in more than 60 companies in a wide range of industries from low tech manufacturing to high tech IT internet development to medium tech in logistics and supply chain management. The results of our investments have led to market capital valuation of US$1.2 Billion with more than 17 IPOs and 31 industrial mergers. Since you have already heard some of the most distinguished speakers comment on the macro economic development of Asia, I thought it might be useful to share some of my experiences at the micro-economic level through the prism of professional investment to attempt to correlate, at this level, some of the interesting observations our previous speakers have made.

I would like to confine my remarks to factors which, I believe, helped China move from the 1970s as the least likely candidate industrial development in the Region, to the entrepreneurial juggernaut it is today. I will attempt to synthesize, again, on a micro-level, the primary factors which have led to her success, in the hope that some of these experiences may relevant to other parts of Asia.

In the late-1970s, to invest in China meant dealing with a large, command and control, vertically structured economy, where all roads led to Beijing. This structure meant that, as a foreign investor, one was placed squarely with interaction of Beijing's bureaucratic elites, who's main mission was to keep propped up the decaying parts of the state-owned enterprises and repressing any instincts towards market reform. As this system fostered generally poor investment results, many changes have taken place to produce one of the most exciting economies in the world. However, in our view, there are still a number of important challenges ahead for this centrifugal economic. I will attempt to identify a few of the more important crises facing China in the upcoming years:

1. THE CRISIS OF ECONOMIC OWNERSHIP.

During the reform period of the 1990s, most decisions of policy were rendered from top down. Central government dictated the pace of change, industrial priorities, banking policies and infrastructure development. Coupled with the still existent state run monopolies, both the embryonic private sector, foreign multinationals and even local municipal and provincial governments, found themselves clashing with Central Government, who's job it was, quite naturally, to ensure the upper hand of its monopolistic subsidiaries. A mayor of a major Chinese city once told me that"my worst enemy in developing my City was the central government", which often frustrated his efforts to develop local industries which were seen to compete with national SOEs.

But by the late-1980s, entrepreneurship was associated with Hong Kong and the development of the Pearl River Basin; Taiwan and the development of the Yangtze River Basin and now South Korea and Japan, developing large parts of the industrial Northeast

China. These cross-border strategies quickly created the largely export-driven low labor cost manufacturing industries in these areas. For these sectors, state monopolies and SOEs were simply irrelevant. They had little impact on the operations of these businesses as both the raw materials as well as the product design meant that little impact on China's domestic economy was felt. This irrelevance of SOEs quickly led to policy decisions which enhanced the burgeoning manufacturing base. Decisions regarding infrastructure development, labor policies, taxation, customs clearance began to be shared by both local and national levels of government.

The second major development in bureaucratic change was China's accession into WTO. This international body was seen, by many in Government, as a sort of extraterritorial legal system which could be used to accelerate reforms, in banking and finance, in corporate governance and, in the most radical area of all, in actual ownership of enterprises. Thus began a process, which I describe as the evolution of national government from being an"owner-operator" to that of"regulator".

In the past, ministries were both owners(of SOEs), regulators(of the industries they controlled) and financiers(by the banks they operated)-the ultimate nightmare of conflicts of interests. With the newly adopted rules of WTO China embarked on a process of economic decentralization whereby the actual ownership of the state owned enterprises would be downloaded from national to Provincial and Municipal levels of government. But the central government was smart. It first chose the wealthiest and most advanced provinces and cities to begin with. Jiangsu, Chejiang, Guangdong, Shanghai were all early adapters. One governor of a major province told me that one of the industrial ministries arrived to tell him he was now the proud owner of 27 light industrial factories in its provinces. That was supposedly the good news. The bad news was that the debt of those enterprises went along with the assets. And, by the way, Central Government was quick to say-"don't call us for assistance in funding the loans."

This decentralization of economic ownership has just begun. It has led to the acceleration of one of the most exciting processes we have witnessed, namely, the commencement of regional government ownership of enterprise, rapidly followed by the privatization of these enterprises. This, in fact, is why you are witnessing the experimental sale of Non performing loans(NPLs) to a select number of foreign financial institutions. Thus, central government is changing from pinstripe suits to referee stripes in less than a decade. This process has a few positive and negative impacts. On the positive side-a rational process towards moving the dead assets of SOEs to a rationalization of value, a gradual reduction of valuable sources of capital now being used to subsidize insolvent SOEs, thus freeing up capital sources for more efficient enterprises. In addition, the relationship between local and national government is becoming less confrontational leading to greater levels of mutual trust. Provinces and cities can now develop their local competitive advantages with less fear of national bureaucratic intrusion. The economy is clearly moving in from a vertical to a horizontally- oriented axis. Provinces are now starting to compete in ways that resemble American southern states in the 1970s and 80s when the competed for the latest German or Japanese auto plant. This competition, however, has led to less control over economic policy at the top and higher levels of local corruption at the bottom.

2. THE CRISIS OF COMPETITION

The intensity of industrial competition linked with a fixed exchange rate has led to the unlikely scenario where China's exports of finished products have actually witnessed price declines of about 5-10% per year, in dollar terms, coupled with wildly accelerating prices of raw materials. China's paucity of raw materials such as steel production, aluminum, oil, copper, have created a dilemma of industrial overheating. Capital inflows have quadrupled in the past three years and industrial production has done the same. Thus, in the manufactured export sectors, Chinese enterprises are running faster but moving in a dangerous trend of primary material inflation and finished product deflation. Is it time for a correction by way of revaluation of the Renmenbi? This may very well be in China's economic interest.

The second area of competitive crisis falls under laws of unintended consequences. Last year one of the brightest talents I have seen in finance joined ChinaVest. His previous job was that of CFO of China's second largest computer manufacturer. This Company, with sales in excess of US$4 billion, was largely an OEM manufacturer of branded computer products for major US and Japanese companies. After WTO entry, it's customers promptly notified them that, under the new rules determined by WTO, these firms could now build and operate their own wholly owned ventures as opposed to the OEM Joint Ventures they now operated. Thus, the Chinese company faced a competitive landscape as never before. As a result, companies such as these, had to develop their own distribution strategies. Once again, the threat of losing long-standing OEM relationships through wholly owned foreign enterprises, may lead to the coveted branding strategies which have eluded the Chinese business model, from Taiwan to HK to the PRC.

3. THE CRISIS OF MANAGEMENT AND GOVERNANCE

Chinese industry has evolved rapidly from the days of cheap, low-tech labor to more skill-based industrial development. The real revolutionary in the 1990s was the Chinese engineer-- first, from Hong Kong, then from Taiwan, then from North America and finally from the mainland itself. China now graduates more engineers than all of Western Europe combined. If you really want to see the cradle, and thus the secret, of China's economic success, visit any major Chinese university campus.

There are more than 50 joint educational programs between Chinese universities and American educational institutions as well as those from Europe, Australia and beyond. These universities, in the 90s were far behind international schools in management, finance, marketing, and engineering. The gap is closing and, with it so too, is the competitiveness of Chinese industry to global competition. However, the rapid privatization of government-owned industry and the competition for experienced management is leading to a critical shortage. This fact is exacerbated by the international trends, and therefore, demands, of greater financial disclosure and transparency.

With the boom and bust cycle of American markets came scandal after scandal. With them came new and tighter rules of corporate governance, tighter accounting procedures and pressure on public companies for greater involvement of boards of directors. I fear, with China's continued ability to attract nearly 25% of the world's foreign direct investment flows year after year, that there may be an explosion of corresponding pressures on management and boards in China. With much talk lately of the"China bubble" more scrutiny by foreign investors is only natural. But the pressure on Chinese regulators and governing bodies will be immense. The ability for entrepreneurial firms, both in China and in the region, to attract capital, at the right price, will be largely dependent on their ability to adopt international practices of governance. Coupled with what I discussed earlier in the area of privatization, there will be a large void to fill in the form of financial managers, internal auditors and outside directors. A challenge, but not necessarily insurmountable.

In my firm's recent experience, the recognition of adopting international standards of accounting and the introduction of outside and truly independent directors has been increasing dramatically over the past ten years. These practices are inextricably linked to the undertaking of long-term growth strategies, more sophisticated financial management and, eventually, the rise of brand building not often seen in the world of Chinese industry. Many have described it, as the revolution of China's economy is tied to the massive increase in the number of engineers(approximately 500,000 annually) who graduate from Chinese universities. This is undoubtedly important. Equally important has been the rise of the number is professional managers, financial and legal specialists as well as the expansion of operations of international law firms, accounting firms and management consulting organizations. All of these factors have led to a new phenomenon-the Regional SOE.

ChinaVest began to notice, in the late-1990s, the emergence of smaller, profitable, highly efficient and modern SOEs, which were owned, not by national government, but by regional and municipal governments. One example is an Auto-parts manufacturer, based in South Central China, which hired a new manager to turn around a failing and antiquated spare parts plant. The new manager promptly approached a foreign automaker with a nearby plant and enquired whether there were any production parts that needed to be imported by the Chinese subsidiary. When he discovered that bumpers were not produced in China, he flew to the supplier, in the US, quickly formed a joint venture and a technology transfer agreement and built the company's market into a$400 million business in two years. That's when the problems really started for the the Mayor.

At once, the City Government was faced with a successful company, with managers who were in revolt over their low pay and pressure from Beijing and provincial authorities to sell the company, or at least, to begin the process of privatization. After a period of evaluation the company was restructured, publicly listed and the City Government maintaining a minority stake in the business. Thus began the template for restructuring the modern SOE. New investors, the foreign industrial partner and management now hold a stake in the thriving business. And this is not the exception. ChinaVest has identified more than 300 companies in the manufacturing sector which qualifies for such a restructuring.

And it all begins and and ends with"ownership". The above-mentioned issues I describe as"Crises" for the the Chinese word for"crisis", (weiqi) literally means"danger" and"opportunity"-a concept which anyone interested in China's economic development and its relationship with the Asia Pacific Region, should always bear in mind. I am clearly a believer in the"opportunity" side of private investment in China and in the Region at large. But we must recognize the two-edged sword that will continue to define the fortunes of development in China and in the Asia-Pacific Region.